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Comment by 9nGQluzmnq3M | Hacker News Reader

Serious question: how do I invest in some of those $10 barrels of oil? It seems like a contract to deliver oil at $10 in 2021 is likely to be worth more than by next year.

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A contract to deliver oil in 2021 is known as a future [0], you can trade these on the market. The "problem" facing you is that the market also understands that the price of oil is going to go up, a barrel of WTI Light Sweet Crude Oil is $21.84 for delivery this May, but $35.53 for delivery next may [1].

[0] https://en.wikipedia.org/wiki/Futures_contract

[1] https://www.cmegroup.com/trading/energy/crude-oil/light-swee...

Just be sure not to let the future contract expire before selling it, otherwise you might end up with a barge full of coal being delivered to your investment firm:

https://thedailywtf.com/articles/Special-Delivery

It's called super contango. If you can find a way to store the oil, the market is rewarding you with this arbitrage, but it's getting difficult to find this much storage

Hm, Sweden used to have huge strategic reserves, somewhere. Wonder if most if those are all destroyed or just empty.

Options Trading would be one approach. You don’t need to actually buy the commodity itself, but instead an option contract that permits you to buy the underlying ( stock, commodity ) at a particular rate by a particular date.

If the price were to rise in the future, the value of the contract would be much higher than what you bought it at, and someone interested in further trading in the options contract or even buying the actual underlying world more pay the market value of that options contract to you.

I just checked: the current price of a single options contract of crude for 18 Sept at buying price (CALL) of USD 10, is 0.3. So buying a 100 (the minimum), would cost about USD 30. Now, ID between now and September the price of crude were to shoot up, then the market price of this option would likely rise.

Unlike stock, though, Options expire. But unlike stock, you get to buy the rights to buy or sell at a particular price and thus the capital needed is far lesser.

The price of those options is not cheap though because everyone else is thinking the same thing.

I think you might be looking at USO if you're seeing a $10 USD call price, or another ETF which doesn't actually match the price of 1 barrel = 1 share. There is no way a $10 call is $0.3 USD when the market price is $20+. It should be a minimum of the price difference between the underlying and the strike price for an in-the-money option.

The $10 barrels are for delivery now, not next year.

If you can store the oil you can earn a lot of money now. But most people can't store much oil, compared to the volumes that are being pumped out of the ground. And for many of the producers, slowing down production by more than a few per cent is also difficult — once you turn off the tap you don't really know whether the oil is going to start flowing again later. So the effect is a steep price fall.

I know no-one here seriously thinks about buying and storing a barrel in their cave, but it’s still worth saying: Oil is surprisingly very toxic, it contains a lot of uncontrolled compounds with sulfur for example, by definition (The goal of refineries is obviously to separate those compounds).

https://www.bloomberg.com/news/articles/2015-11-03/that-time...

> once you turn off the tap you don't really know whether the oil is going to start flowing again later

Wait, really? I'm Googling but can't seem to find anything at all about shutting down oil wells temporarily.

What exactly is the difficulty? Why would "turning off the tap" be a risk -- the pressure oil might be under isn't going to go away, is it? (If it doesn't require pumping.) Is it a risk that materials in the drilled hole harden if not moving? I would have thought the difficulty might be how to effectively cap a well that is under pressure -- is it so difficult that closing a well risks damaging the equipment that it can't be safely opened back up?

Really curious here if you have the answers! The fact that oil wells can't be slowed down is definitely one of the most surprising economic facts I've learned in a long time.

I got this verbally from my uncle, whose day job was to find ways to extract more oil from rocks.

To begin with, the oil is there, stably, at rest. At some point people come along, estimate the layout of the rocks (many km³ and far underground) and drill holes to change the way the pressure works and make as much as possible of the oil flow to a particular location. The geology decides how much that is, modified by the paths of the holes involved, and also by how much water is pumped in, where.

If you now close it quickly, the pressure's going to change somehow and you don't know precisely where and how. The end effect may be that when you reopen, something has changed down there such that instead of extracting 40% of the total oil you can only get 39%. Or such that you have to drill more holes in order to gain back your production velocity, the cost of which is far higher than producing at a loss for a month.

And think is why the stock prices of companies that have a bunch of oil tankers has shot up.

also oil storage is probably not covered by your house insurance :)

> once you turn off the tap you don't really know whether the oil is going to start flowing again later

You mean it can actually physically stop if the flow from the ground is blocked for a while? Can you expand if possible.

Edit: I understand it comes out of the ground quite hot (I've heard of 200 C) and if it flows into cool pipes and stays still maybe it would 'congeal'.

No, it's a matter of the complicated and only partly known geology underground. See other answer.

Another way of looking at it is: You've drilled holes to make the oil flow. There are kilometers of rock on top of the oil layer, pushing down, pushing the oil towards the holes you've drilled. You can close the end of the hole, but you can't make that weight go away. The system is going to find a new equilibrium. The new equilibrium is not one you've tried to optimise for maximum total oil production.

It’s simply not true that you don’t know if the oil will flow again. It will. The subsurface pressure and fluid behavior is well understood.

One of the only scenarios that might lead to wells failing to flow when reopened would in wells that were freshly tracked without flowing back the frack water. In this case the frack water will soak into and damage the clay-like minerals in the rock and damage the permeability of the rock.

While there can be a great deal of pressure pushing the oil up the well, there is also resistance to that flow up a narrow pipe (perhaps 4 inch pipe). The balance of forces can be very close but the momentum can keep the flow going. In some fluids, there can be methyl hydrates (or wax) that can cause problems with maintaining flow. There can also be particles that are moving in the fluid (sand), slowing or stopping the flow can cause these particles to settle, preventing future fluid movements. There is a temperature and pressure gradient which can allow dissolved gas to bubble out the fluid as it ascends the well which can lead to added complexity. And we haven’t yet discussed oil recovery methods like gas/water injection or electrical sub surface pumps. Getting a well restarted after shutdown, may not be possible. I worked with some petroleum engineers, getting the best from your wells can be a very complex simulation problem followed by expensive engineering solution.

Oh, so it's a matter of the well itself too, not just of its surroundings? TIL.

Yes, and also to agree with Arnt (sibling comment), there can also be effects between neighbouring wells. In some fields, the fluid/gas can move easily (wells will affect each over) in others, there is little ability for movement. The fracking that engineers do attempts to add additional channels for the fluid/gas to move. So trying to turn down one well can lead to other effects. And in changing the situation, there will transients which will decrease over time.

Why not just buy an OIL ETF when you think it hit the bottom.. for example https://finance.yahoo.com/quote/OIL?p=OIL

This doesn't directly answer your question, and many have replied already, but I thought you might like this:

https://www.bloomberg.com/news/articles/2015-11-03/that-time...

Find a broker, buy some futures.

the article says the futures are still trading high, meaning you probably couldn't make a lot of money buying them right now, likely because traders know the prices are going to come up too.

Am I misunderstanding?

You’re correct.

Selling the futures is the profitable end of the trade. Spot prices for WTI are about $20. That same oil can be sold in May 2021 for 35.53. Part of that difference is cost of carry (storing and insurance), but there is still a profit to be made.

That's risky though, it's possible to get ruined by buying futures (or put options for that matter) since it's basically a contract that must be fulfilled at some point in the future. AFAIK normally they function as insurance for buyers and sellers, to create more market stability.

Crude futures are liquid enough that you can almost always sell them before fulfillment date if you do not want to be on the hook for the obligation. They can't be early exercised like options can.

Put options are called options for a reason

You never have to exercise if you don't want to so there's a fixed maximum cost

I'm no expert in this, but my understanding is that futures are a mutual obligation and options are a one-sided obligation. So in case of a put option, it's optional for the other side - in case of a call it's optional for me.

Correct me if I'm wrong, but I assume there is a good reason why banks require additional paperwork from people who want to trade options/futures that must be renewed on a regular base.

I think you're probably thinking about the difference between Writing (or selling) options and buying them

Both call and put options are optional for the option holder to exercise (realistically you only ever exercise if they are in the money, or worth something). You usually don't need any additional paperwork to buy options

Writing options on the other hand has unlimited potential downside. It's much harder to get brokers to allow you to do this. Many will only let you write "covered" options - meaning you also hold the underlying shares, which limits your downside

Actually, if the OP is asking a question like that, they should stay far, far away from the market. It is not a game for newbies.

Cannot agree more. But maybe they want to learn.

The key is not to invest in oil, but in companies that can store it. There's potential for oil tanker storage companies to shoot up as more people realize this. See this article:

https://adventuresincapitalism.com/2020/03/19/crude-contango...

Given that you're asking this question, USO ETF. The alternative is options trading which is a bit more complicated but, if you're interested, is really fun to learn about.

> USO Fund Description

> USO holds near-month NYMEX futures contracts on WTI crude oil.

https://www.etf.com/USO

Without looking any deeper I don't think this is what OP is looking for. They want to bet that oil delivered a year from now is under-priced today, while buying this ETF is betting that oil delivered a month from now is under-priced today (and holding this ETF is repeatedly renewing that bet). It's a completely different thing.

buy a semi trailer for gas and fill it now, sell it in 2021.

I've had the same thought, but counterpoint:

gasoline degrades with a shelf life measured in weeks-months-years, depending on grade and preservative measures

Depending on the curve of the pandemic, 2021 may be too early. The way the US govt is responding, it may drag out much longer

If you have to ask how to do this on HN, you're too late. Pricing has already been set by Black-Scholes, and unless you have a seat on the CBOE you're better off going to Vegas.

Come on now reddit wallstreetbets is up there with Vegas now for gamblers looking for a fix

I think /r/wallstreetbets is the modern version of interactive fiction, or perhaps even the evolution of fireside-storytelling that civilization has had for 10,000 years. "The mammoth was THIS BIG! //extends neanderthal arms for affect//"

Instead of directly trading oil barrel options or futures, I'd suggest picking a long etf tracker. It's much lower risk to achieve the same goal.

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